The promise of governmental buyers’ clubs

The current issue of The Atlantic Monthly has an article concerning the efforts of Bill Clinton’s foundation which addresses this issue. The article shows how governments can work with markets for the benefit of large numbers of people and the planet by guaranteeing demand for a particular product or service. By doing this in the long-term, the production of beneficial goods and services can achieve the economies of scale that will make them practical to use within a few years, instead of decades from now.

The Clinton Foundation used this powerful idea to cut prices for AIDS drugs in Africa and the Caribbean for hundreds of thousands of people. In Clinton’s words, “All we did was take something that people would naturally do in a purely business market and apply it to the public-goods market.”

I’m not sure if Clinton is referring to the technical definition of “public goods” here, which refers to a good whose consumption does not reduce any other’s consumption of that good, and a good that all have access to, such as information or air.

The Earth’s climate is most certainly a public good, and its radical warming would most certainly be a public bad. So the Clinton Foundation worked with a new group of cities, the C40, to create large-scale demand. If big cities could come together to provide a market to jumpstart new, energy-savings technologies, it would give quite a boost to efforts to mitigate global warming. As the author of The Atlantic article points out, cities have quite a source of demand at their disposal:

Cities own public buildings: offices, schools, police stations, hospitals, fire stations. They set codes for private buildings. They buy and run fleets of vehicles: buses, garbage trucks, police cars, and ambulances. They handle water and waste. No city by itself can make a deep dent in carbon emissions or reorganize a global market, but together cities can pool their demand for leading-edge conservation technologies … Predictable demand would let suppliers scale up their operations, bringing prices down and creating footholds for technologies on the cusp of commercialization … In October 2005, 18 of the world’s largest cities … had held a summit where they resolved to do something about global warming … Among the cities’ resolutions was to create “municipal procurement alliances” — buyers’ clubs — to “accelerate the uptake of climate-friendly technologies and measurably influence the marketplace.”

Another area in which a buyers’ club of cities would have a huge impact is in the purchase of subway equipment. There is no longer a domestic subway industry in the United States, and when New York City recently spent billions on new subway equipment, they could only receive bids from European or Japanese firms.

In 2001, I participated in a conference on the reindustrialization of the United States at Columbia University. One of the organizers, Professor of Civil Engineering Robert Paaswell (who ran the Chicago Transit Authority under Mayor Harold Washington in the 1980s), noted that one of the major impediments to the revival of a subway equipment industry is the instability of the market.

Cities usually wait as long as they possibly can to order billions of dollars worth of subway equipment, and then they create an avalanche of orders. The U.S. subway industry could not survive this boom-and-bust mentality. Paaswell points out that if the major subway-buying cities cooperated in smoothing out their purchasing schedules, the guaranteed demand would allow for the maintenance of a productive subway industry, just as creating a buyers’ club for AIDS drugs brought down the price of drugs, as the Clinton Climate Initiative hopes to do with energy efficiency in cities.

While Clinton wraps explanations of his efforts in market-centric language, in reality he is talking about a true market-government partnership, in which each “side” is equal and gains from the exchange. As is my wont, I will extend the idea of government buyers’ clubs to the point of political impracticality in order to show how it might work on a grand scale:

Suppose we committed to spending a trillion dollars or two in order to install solar energy, or wind, or geothermal heat exchange systems throughout the land. Governments, from federal to local, could just pick particular technologies and slap them on roofs, in wind farms, and under buildings. But a better solution would be for governments to make a certain amount of money available, as a grant, to each building owner; to pick and choose whichever technologies the owners wanted, as long as the technology was solar, wind, or geothermal. There would still be a vibrant market in wind/solar/geothermal technologies, even though the financing would come through the government.

Hundreds of years ago Alexander Hamilton argued that the government was justified in protecting what he called “infant industries” from foreign competition, in order to give them time to gain the strength to take on global competitors. These days we also face the problem of getting important technologies up to speed, particularly when economies of scale make a difference. Government can work with the market to move us into a more sustainable future.